Cash Management: the North American Approach – II

Cash Management: the North American Approach – II

Author: Kelvin Walton

‘This article is the second and concluding section of gtnews’ examination of the use of technology to support the special requirements of U.S. and Canadian cash management operations. Together, the two articles form one part of the series addressing the nature and benefits of technology deployment in corporate treasuries. They provide a relatively high level introduction to the subject, primarily for executives who are new to this aspect of international treasury business.

‘The intention is to provide an initial appreciation of the special demands terminology and of North American cash management, and to describe the ways that requirements are fulfilled by different aspects of cash management technology’.

Interest Earnings and Earnings Credit on Bank Accounts

It was noted in the prior article that , historically, U.S. banks were not permitted to accrue and pay interest on business checking account balances. This situation has now been adjusted, through the operation of the ‘Earnings Credit’, based on average balances, which is used to offset the fees charged by the banks for the provision of various services. With some of the changes in banking regulations in the last few years, banks can now accrue and pay interest on balances in hard cash, or they can calculate earnings credits for offset against fees. However, excess credits cannot be paid in cash to the accountholder. The elated impact on cash management processes is the requirement for evaluation of the available alternatives (hard cash interest payment versus earnings credits) on corporate funds, and this places demands on the supporting technology to optimise performance.

Given the fact that there are no U.S. national banks with branch service in every state or territory, any foreign corporation doing business in the U.S. will have some decisions to make in this area.

Bank Relationship Management and Wallet Share Analysis

Bank account management and electronic bank account management (BAM/eBAM) both originated in the US, primarily due to the complexity and scale of domestic bank relationship networks compared with other parts of the world. The subject is addressed in the earlier article http://gtnews.afponline.org/Articles/2013/Cash_Management__Bank_Account_Management.html

The US cash management function has, arguably, a more evolved approach to bank relationship analysis than in other countries – as reflected by the related integral modules in treasury technology and through a range of specialist stand-alone systems. The business focus of the analysis is on quantifying the full costs of each relationship, through deriving all fee-based and other bank charge debit information from the relevant BTRs (balance and transaction reports). This information may not be intuitively presented; hence the frequent use of technology to derive dependable analytical results, so different bank relationship costs may be objectively compared.

Treasurers are naturally concerned with measuring the respective wallet share of their cash management banks, to analyse comparative costs and benefits and negotiate from an informed position of strength. This effective use of technology places U.S. treasurers in a strong competitive position.

Cash Accounting

The generation of accounting journals based on every cash flow, including fees and charges, is a standard feature of technology use in US treasuries. The accounting rules and chart of accounts for cash accounting are maintained in the treasury technology system. Journal entries are analysed in detail and summary format in standard treasury reporting, and are exported (usually as a daily summary) to corporate general ledger systems for posting and consolidation. Therefore treasury and corporate systems need to be synchronised and controlled so that consistent charts of accounts are used in both, imposing further demands on the software. Cash accounting functionality tends to be expressed as an integral module of the treasury system, but stand-alone solutions are available.

FBAR – Foreign Bank Account Reporting

FBAR reporting is an obligation of U.S. organisations to file an annual report to the U.S. Department of the Treasury if the total balance of all bank accounts held outside the United States equalled or exceeded a value equivalent to $ 10,000 at any time during the reporting year, which corresponds to the calendar year. The filing deadline is the last business day in June. The FBAR regulation applies to all U.S. based subsidiaries of foreign organisations which operate foreign bank accounts. Its scope encompasses the U.S. entity’s directly owned accounts, and also accounts over which signatory authority is held. The reporting requirement is complex, as an FBAR must be filed for each account holder and each signatory, so that there will often need to be multiple FBARs prepared for a single foreign bank account. A further complication is that the annual reporting must include details of all individuals who held the relevant account ownership or operating authority over the entire year. The penalties for late FBAR filing can be severe.

FBAR compliance is a straightforward requirement for effective BAM technology. The key to an effective solution is a database that includes the full year’s history for each foreign account’s owners, signatories, balances and related information. Given the existence and maintenance of this database and supporting system, preparing the report on time and filing it electronically will present no significant problem. If such an exercise is performed manually, it can provide a real challenge.

Treasury Payments: Wires

North American cash management retains its own conventions in the origination and management of wires – electronic payment transactions initiated by corporates and executed by banks. Wires may originate through the settlement of treasury transactions such as FX deals and opening time deposits and borrowings, through other types of treasury cash mobilisation and for executing commercial payments. The scope of treasury’s involvement in wire management will often be more substantial than is generally found outside North America, and high wire transaction volumes are stress points and bottlenecks for some kinds of treasury technology. North American systems are generally most likely to be better fit for purpose in this function, because of the blurred cash management overlap between treasury and finance. Stand-alone wire management systems are sometimes used to optimise performance.

US cash management technology must accommodate the origination and management of wires for transmission and execution via the automated clearing house (ACH), Fedwire and Clearing House Interbank Payments System (CHIPS) systems. ACH is used for high volumes of low-value transactions, namely bulk commercial payments organised in batches. Fedwire, operated by the US Federal Reserve Banks and CHIPS are used for high-value, low-volume domestic and international wire payments.

The supporting technology will manage all kinds of ACH, Fedwire and CHIPS wires, including creation, validation, approval, transmission and monitoring, with high levels of security and control.

The Future: Further Globalisation?

It seems likely that many of the special features of North American cash management will continue unchanged for the foreseeable future, since ‘they ain’t broke’ and represent long-established practice in a truly vast market.

In April 2012, the San Francisco Fed published data showing a striking 10-year decline in commercial cheque volume and total dollar value of cleared cheques, and described emerging payment technologies that provide more convenient and secure solutions. (http://www.frbsf.org/education/publications/doctor-econ/2012/april/check-processing).

The differences in bank communications and cash positioning workflows noted are eroding as contemporary secure web-based BTR management solutions displace older technology. An important development is the widening adoption of SWIFT by North American corporates, providing a robust, standardised solution for BTR, wire and bank relationship management.

The aftermath of the 2008 financial crisis saw the sustained elevation in finance executives’ priorities of securing dependable corporate liquidity in enterprise-wide cash management. It is likely that North American cash management will, along with the rest of the world, continue to stimulate the development and deployment of powerful supporting technology, and that integrated TMSs will provide flexible solutions for growing numbers of multinationals. This will especially be the case when an acquisitive corporate action by a foreign company in North America is followed by treasury integration.

Some of the language used varies in different parts of the global cash management operation, but the underlying trend is towards integration combined with central visibility and control, facilitated by flexible and generic technology.

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